ConocoPhillips CEO causes stir with OPEC warning

ConocoPhillips Chief Executive Ryan Lance has caused a stir by warning an audience including OPEC oil ministers that North America could become self-sufficient in oil by the middle of the next decade, ending the region’s dependence on imports.

“In 1990, North American reserves and production were falling, but thanks to unconventionals proved reserves have risen 68% since then,” Lance told an audience of OPEC ministers on Wednesday.

“North America could become self sufficient in oil as well (as gas) by 2025,” he said at a conference before OPEC’s policy-setting meeting in Vienna.

Lance probably overstated the potential for regional self-sufficiency. The most comprehensive estimates put potential North American production at no more than 15-18 million barrels per day by 2035, up from 11.4 million in 2011 but still somewhat short of the 21 million barrels per day that the United States and Canada consumed last year.

Even on the most optimistic scenario, the United States will still be importing some barrels from outside the region. Since prices are set in the margin, U.S. consumers will still be vulnerable to political instability in the Middle East, Africa and Latin America.

And the extensive two-way trade in oil products between North America, Europe and Latin America will continue to tie pump prices to global developments even if the region becomes largely self-sufficient in crude.

ISOLATION IMPOSSIBLE

“The worldwide market for oil makes it almost impossible for a large country like the United States to gain independence, or separation, from that market,” according to the authors of a report by the U.S. Congressional Budget Office published last month (“Energy Security in the United States” May 9).

In 2025, the United States will still be employing military force around the world to keep sea lanes open and safeguard access to critical oil supplies.

“U.S. independence from the worldwide market for oil would require a degree of isolation that is almost certainly not feasible or desirable in such a global economy.”

“Even if the United States produced all of its oil, it could only cut itself off from the world market and its price fluctuations by prohibiting private firms from trading internationally (which would violate rules of the World Trade Organization).”

In 2025, the United States will still be employing military force around the world to keep sea lanes open and safeguard access to critical oil supplies.

IMPACT TO BE GLOBAL

Rising North American production could have a dramatic impact. However it will be on global prices and on the global balance of power rather than in North America itself.

The distribution of unconventional and deepwater oil resources is very different from conventional fields. The majority of unconventional fields lie outside the unstable areas of the Middle East.

As a result, most of the increase in global oil output over the next decade is projected to come from the western hemisphere. OPEC’s share of global oil production is set to decline for the first time since the 1980s, diluting the cartel’s influence on prices.

By boosting global output, the development of unconventional and deepwater resources in North America and the rest of the hemisphere could also cap, even partially reverse, the relentless upward trend in prices since 2002.

Rising North American production may not make the region self-sufficient, but it could still transform the dynamics of the market. “If I was an OPEC minister I would be concerned,” according to Paul Stevens, a senior research fellow at the Chatham House Royal Institute of International Affairs in London.

IMPORTS STILL NEEDED

In September 2011, the U.S. National Petroleum Council (NPC), which advises the federal government, published a comprehensive assessment of North America’s potential oil and gas production (“Prudent development: realising the potential of North America’s abundant oil and gas resources”).

The optimistic tone marked a big turnaround from the last survey, published in 2007, which was entitled “Facing the hard truths about energy” and had warned about “accumulating risks to the supply of reliable, affordable energy”.

Nonetheless, the new report’s central projection assumes additions to reserves and production will simply offset the continued decline in output that would otherwise have occurred as old fields are depleted. Only the most optimistic (unconstrained) scenario sees a big addition to North American output and fall in import requirements from the rest of the world.

“U.S. and Canadian oil production, despite its high levels, currently falls well short of satisfying demand in the region,” the authors note. “The North American oil supply potential discussed (in this report) does not indicate U.S. and Canadian oil production could grow sufficiently to bridge this gap, unless there are also significant declines in demand for oil.”

If the strong portfolio of North American oil development options is exploited, “there are grounds for optimism that North America can continue to be a major crude producer to 2050 and beyond, meeting a significant proportion of its market needs”, the report says.

“In a reasonably unconstrained case, the United States and Canada could produce up to 15-18 million barrels per day by 2035, potentially a much higher proportion of regional demand than today.”

“In a reasonably unconstrained case, the United States and Canada could produce up to 15-18 million barrels per day by 2035, potentially a much higher proportion of regional demand than today.”

But it is more likely production growth will be somewhat or very limited by political, regulatory and technology issues, and new resources will replace rather than add significantly to current production, according to the NPC.

NORTH AMERICAN OUTPUT

The NPC report notes cautiously: “North American oil production growth potential can come from a number of sources, including Canadian oil sands, the U.S. offshore, tight oil, enhanced oil recovery, Arctic exploration and oil shale (in that order of scope and development lead time). The point is that further development of these sources could lead to lower future declines in total U.S. and Canadian oil production.”

The biggest potential increase in oil production comes from Canadian oil sands, which could rise from 1.5 million barrels per day at present to 3 million to 6 million bpd by 2035, according to the survey, depending on the pace of development, as influenced by access, the regulatory environment, technology and supply chain issues.

Tight oil, such as that produced from North Dakota’s Bakken formation, could grow from half a million barrels per day to 2 million to 3 million by 2035. Offshore oil production is projected to remain flat at 1.8 million bpd or rise slightly to as much as 2.3 million.

But conventional onshore non-Arctic production will probably continue falling, with enhanced oil recovery techniques and CO2 injection slowing the rate of decline. The report foresees output of 1.5-4.0 million bpd in 2035, compared with 3.4 million now.

Projections about resources and production are subject to immense uncertainty. The report lists numerous examples of failed forecasts (some went wrong surprisingly quickly). “The history of the petroleum industry is replete with instances of overly pessimistic predictions and ’good’ resource-related surprises,” the authors note. “Currently ignored and discounted oil and gas resources might have the potential to provide similar surprises in future.”

Production of tight oil from North Dakota’s Bakken and Texas Eagle Ford has already surpassed the levels predicted in the “Prudent Development” report less than 12 months ago. So further upside surprises are possible.

If production continues to grow faster than expected and consumption falls even slightly, it is possible North America will achieve the self-sufficiency potential outlined by Conoco’s Lance. It is more likely that output will fall somewhat short.

But even if North America does not become self-sufficient, let alone achieve energy independence, Lance is right to point out the transformative potential of unconventional oil, which will radically reshape the geopolitics and business of oil over the next decade, especially if techniques pioneered in the United States can be copied in China, Latin America and the rest of the world.

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